It is hard for most independent advisors to imagine FINRA, which monitors the brokerage industry, providing oversight to RIAs. The regulator upholds a professional standard for commission-driven brokers that some say veers off sharply from the one to which independent fee-based advisors subscribe. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has the advisory profession on the cusp of major changes.
Next month the SEC reports to Congress on its recommendations for enhancing examinations for investment advisors. FINRA, meanwhile, is trying to persuade movers and shakers on the Hill that it already has the answers.
ALL DOLLED UP
At its meeting in August, FINRA's board of governors agreed to take action on three proxy proposals meant to increase disclosures about its activities, which some say will better position it for an expanded oversight role:
* First, FINRA agreed to disclose compensation details for its 10 most highly compensated employees each year, according to an email from Richard G. Ketchum, FINRA's chairman and chief executive officer.
* Second, the board will publish the names of the money management firms that it hires to manage its portfolio, beginning with the release of its audited 2009 annual financial report.
* Third, the board will communicate to firms and publish on its website rulemaking items discussed, and decisions the board has reached on new rules.
FINRA then met with SEC staff on Oct. 6, and Ketchum followed up with a comment letter on Nov. 2. It said the SEC lacks the resources to monitor independent advisors effectively and ought to create a self-regulatory organization (SRO) to handle the task.
The nine-page letter touted FINRA's long track record of self-regulation in the securities and brokerage channel, the fact that FINRA and the SEC examine about 55% of broker-dealers each year and that the SEC maintains oversight of FINRA's rule-making and other critical functions, suggesting that such oversight might minimize any culture shock to independents. For this story, FINRA preferred to comment through Ketchum's email updating the membership on the August board meeting.
SRO COMING?
Some observers think the current Washington climate heightens the prospect of an SRO such as FINRA for independent advisors. Republicans now have a majority in the House and a stronger presence in the Senate. The new policymakers reflect voter backlash on government spending, among other issues. They might prefer to hand the task of additional oversight to an established entity, instead of allocating more money to the SEC, to beef up its monitoring of RIAs.
As directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC is conducting a study on how it should go about enhancing examinations for investment advisors. The SEC will look at the number and frequency of RIA examinations that have occurred over the last five years, in the context of whether it should establish an SRO to complement its efforts to monitor RIAs. It will report its findings to the House and Senate committees on Banking, Housing and Urban Affairs in January 2011.
Against this backdrop, FINRA's tactics suggest it is trying to be more appealing to the industry. "Whenever an organization is trying to regain or maintain any type of reputation, the first thing they do is shed some sunlight on the situation," says Brian Hamburger, founder and managing director of MarketCounsel, a compliance consulting firm based in Englewood, N.J.
BOTH SIDES NOW
Jed Bandes is president of the Mutual Trust Company of America Securities in Clearwater, Fla., an advisory firm that operates on both a broker-dealer and an RIA model. A newly elected small-firm FINRA board member, he says six months ago he would not have thought FINRA was cut out to provide oversight to RIAs. But after joining the board and seeingthe way FINRA staff sought his perspective as a small firm, the experience helped change his mind.
Bandes says the level of scrutiny that his broker-dealer platform faces speaks volumes about FINRA's ability to monitor all advisors. "They're the only organization capable of doing so."
In the November letter, Ketchum laid out a detailed case. An RIA SRO should have the authority to make rules, to the extent that the SEC would allow it. SEC approval and oversight of those rules would ensure that they are appropriate for RIAs, he said. He said an SRO for independent advisors "should be designed to prevent any undue industry influence and ensure appropriate staff independence." The governing body should largely comprise public representatives, with members of the RIA industry taking the remaining seats. Were FINRA to seek authorization as theSRO, it would create a separate affiliate organization with its own board, to ensure that ensuing programs are appropriate to independent advisors, he wrote.
NOT SO FAST
Yet FINRA is still moving against a strong current of skepticism and unpopularity. Among the independent channel's chief objections is the rich compensation given to former FINRA officials. In its annual salary survey of Form 990s filed by 22 regulatory, industry and municipal market-related groups, The Bond Buyer found that four former FINRA officials were the highest paid among the officials of those groups. Among them, Mary Schapiro, chair of the SEC and FINRA's former chief executive officer, received $9 million when she left in 2009, and Elisse Walter, SEC commissioner and FINRA's former senior executive vice president for regulatory policy got $3.7 million.
"People have figured out that the leadership at FINRA makes an awful lot of money," Hamburger says. It's not through FINRA's own disclosures, he explains, but when the outgoing leaders take government jobs and have to make disclosures.
FINRA did not seem to honor the spirit or letter of the proxy proposals, says William Anderson, an attorney with the Washington law firm of Cuneo Gilbert & LaDuca. Anderson represents Amerivet Securities, a small broker-dealer that submitted seven proposals to the FINRA board. The principal of that broker-dealer, Lt. Col. Elton Johnson Jr., is serving overseas and was unavailable to comment. Although all the proposals garnered a two-thirds majority vote from the members that cast ballots, four received no action.
FUNDING AN ALTERNATIVE
Fans of continuing SEC supervision say that the pending shift next summer of about 4,000 advisors to state registration and regulation should lighten the regulator's workload. Congress could allow the SEC to charge user fees to registered firms to fund additional costs of supervision and enforcement.
Bill Ramsay, president of Financial Symmetry, an RIA firm in Raleigh, N.C., suppports that measure."The SEC has been under-resourced for many years, and given the current budget climate, we are willing to pay for supervision by the SEC so that it will not cost taxpayers," Ramsey wrote in a comment letter on Nov. 4. "This is how SROs are funded, and we feel that it is entirely appropriate for the SEC to do so as well."
If FINRA does end up overseeing independent advisors, the group needs to make some changes, says David Tittsworth, executive director of the Investment Adviser Association. "I want to see an organization fully transparent and accountable, without a bias favoring broker-dealers or their regulatory model, reasonable in terms of cost and an effective and efficient regulator."
